There are many financial mistakes we make that don’t cause the earth to crumble beneath our feet. Take a tendency to pay scant attention to rainy-day savings. You may fail to move your money from an account paying 0.1 per cent interest, but the meagre returns last only as long as your apathy.

Or say you became locked into a fixed-rate mortgage just before interest rates were cut to record lows in 2009; when the mortgage term reaches an end you simply re-mortgage to a lower rate.

Most of us are guilty of neglecting or muddling through money matters at one stage or another – and in the vast majority of cases we emerge relatively unscathed. But there are a handful of occasions when a wrong turn can lead to catastrophe.

One of these is the process of turning pension savings into an income, where the number of people who lose out through no fault of their own is a national scandal. Every year, some 800,000 people reach age 65. Around 400,000 retire by purchasing an annuity. This is an insurance product that converts your life savings into a stream of income that is guaranteed to last as long as you do.

There is nothing inherently wrong with buying insurance to guard against outliving your retirement savings. For many it makes sense. But this is a one-off, irreversible transaction, that will determine whether the maximum benefit is extracted from a lifetime of saving. And the insurance industry, aided by successive governments’ fear of elderly people exhausting their savings and falling back on the state, is perpetrating a rip-off that deprives pensioners of huge chunks of their own money.

It is unusual for authorities from within financial services, particularly those with expertise in the dry field of pensions, to use such colourful language to attack their own industry. But as they point out, the most toxic aspect of the annuity sales process is how customers are kept in the dark.

The process starts with a “wake-up” pack sent to savers months before their named retirement age, in which pages of often unintelligible information, packaged in unhelpful ways, baffle even the well-informed. Most people resort to telephoning their trusted pension provider, typically an insurer, hoping for help. But once on the line, well-trained salesmen inevitably direct the customer towards purchasing the in-house annuity.

Anecdotally, there is evidence that some firms only make passing mention of a customer’s right to shop around for a better deal. This is understandable, as it would result in a loss of business. The result is that more than half of savers buy an annuity from their pension provider, leaving tens of thousands out of pocket. Just a handful of firms offer what analysts class a “fair” rate; the rest make eye-watering profits by providing lower annual returns that the saver then suffers for life.

This is the “exploitative” pricing roundly criticised by the regulator’s Consumer Panel. It only takes one example to show how this works. In August, Clerical Medical, part of the state-backed Lloyds Banking Group, offered £4,664 a year for each £100,000 used by a 65-year-old to buy an annuity. By contrast, Reliance Mutual offered the customer £6,111. That 30 per cent gap lasts for life; so if a saver unwittingly took the Clerical Medical deal, he or she would be £36,175 worse off by the age of 90. This is the age at which an insurance company expects a healthy 65-year-old to die.

Separate data, shown to The Daily Telegraph by an industry insider, suggests that the least generous pension providers are able to make profits of £35,000 over a 25-year retirement. The similarity between these two figures may be a coincidence, but the source said otherwise.

This is why a former executive of Scottish Widows admitted in March that annuity takings are worth 20 times the profit made on other insurance products.

There are similarities with energy firms, which face grillings for maintaining gas and electricity profits at roughly 5 per cent, to the detriment of households, some of whom must this winter choose between heating and eating. By comparison, some insurance companies make an estimated 20 per cent profit margin, perhaps more, by lifting vast sums directly from pensioners’ life savings.

The elderly who suffer from medical conditions are even worse off. Those in poor health should receive a higher income – thus returning their savings more quickly – to account for shorter life expectancies. The range of conditions that qualify for a boost varies from a smoking habit to bowel cancer; around six in 10 people aged between 60 and 70 are in a position to qualify, medical records suggest.

However, research conducted in November by this newspaper’s Your Money section indicated that insurers pocket £63 million a year by directing more than half of all savers in poor health towards pensions designed for the “super-fit”.

There is an escape route from all this – and those who have received wind of the dangers are increasingly taking it. Since 1975 it has been every customer’s right to use a middleman to shop around for a better deal. The Consumer Panel noted the rise in popularity of annuity “brokerages”, which take the form of websites, with telephone helplines, that list the rates on offer from competitive firms such as Legal & General, Aviva, Just Retirement and Partnership.

However, even this path is riddled with traps. The fees taken for very basic services can be astonishing, in some cases hitting 6 per cent. This means that £12,000 is paid to the salesman for putting each £200,000 into an annuity. Insurers hide this cost by factoring it into the miserable payout rates. Other parties in the annuity supply chain take a cut to keep this commission figure high. Marketing firms masquerading as brokers purport to find the best deal, but just take hundreds of pounds in referral business to another salesman. This is what the Consumer Panel meant by opaque charging.

Perhaps the biggest industry failing, though, is neglecting to steer savers away from annuities when other options are more appropriate.

In 2011, the Government removed the need for pensioners to purchase an annuity by the age of 75. The alternative is to leave a pension invested in the stock market while making regular withdrawals to fund living costs. The danger in taking this route, “income drawdown”, is that poor investment decisions deplete savings too rapidly. Even so, executives at major insurance firms admit that anyone with more than £50,000 saved should at least explore the possibility. Typically, though, only independent financial advisers will alert customers to this route, as the profit margins are far slimmer for pension firms – and almost non-existent for brokers.

It is this type of high-cost mistake that will come back to haunt many who have diligently prepared for old age, only to see their savings raided by a profit-hungry insurance industry and its sales forces. If we are to reverse the well-documented savings crisis in Britain, correcting these systemic pension failings should be bumped to the top of the list.